Consider the following simplified financial statements for the Wims Corporation (assuming no income taxes): Income Statement Balance Sheet
Sales $38,000 Assets $27,300 Debt $6,700
Costs 32,600 Equity 20,600
Net income $5,400 Total $27,300 Total $27,300

The company has predicted a sales increase of 20 percent. Assume the company pays out half of net income in the form of a cash dividend. Costs and assets vary with sales, but debt and equity do not.

a. Prepare the pro forma statements.
b. Determine the external financing needed.

Answer and Explanation:

a. Proforma income statement

Sales                    $45,600

Costs                    $39,120

Net income          $6,480

b. Proforma balance sheet

Particulars           Amount           Liabilities               Amount

Assets                 $32,760           Debt                       $8,950

                                                     Equity                     $23,810

                                                     Total                       $32,760

External finance = Predicted debt - Beginning debt

= $7,585 - $6,700

= $885

Working note:-

For pro forma statements:

Sales = $38,000 × (1 + 0.20)

= $38,000 × 1.20

= $45,600

Costs = 32,600 × (1 + 0.20)

= $32,600 × 1.20

= $39,120

Net income = Sales - Costs

= $45,600 – 39,120

= $6,480

Assets = 27,300 × (1 + 0.20)

= 27,300 × 1.20

= $32,760

Equity = Beginning balance + Net income - Dividend

= $20,600 + $6,480 - ($6,480 × 1 ÷ 2)

= $20,600 + $6,480 - $3,240

= $23,810

Debt = Assets - Equity

= $31,760 - $23,810

= $8,950

answer; capital structure decision;